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2014 Consumer Products Industry Outlook

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With economic growth in developing markets slowing, CPG companies will continue to enhance their digital commerce capabilities to maintain revenue growth and take advantage of market and economic trends.

For several years, consumer packaged goods (CPG) companies have relied upon the strength of developing markets to compensate for sluggish economic growth in more mature economies. However, recent economic headwinds in major developing countries like China, Brazil, and India are forcing companies throughout the consumer products industry to work harder just to maintain profitable growth. Pat Conroy, vice chairman and U.S. Consumer Products leader for Deloitte LLP, shares his perspective on the year ahead, and how CPG companies are increasingly embracing digital commerce to succeed in the current climate of economic uncertainty.

What is the biggest challenge facing the consumer products industry in the coming year?

Eroding brand loyalty: For the third year in a row, brand loyalty in the food, beverage, and household goods product categories has declined, according to the 2013 American Pantry Study.¹ The percentage of “must have” brands—those brands consumers will purchase whether on sale or not—slipped from 33 percent in 2010 to 29 percent in 2012 due to sales on competing national brands, less expensive brands, and private label offerings. The threat from private labels remains as many U.S. consumers (88 percent) have found several private labels they feel are just as good as national brands. Moreover, relatively few consumers (27 percent) plan to switch back to national brands from private labels when the economy improves.

Consumers’ prolonged recessionary mindset: Economic uncertainty and the severity of the last recession have left U.S. consumers cautious, frugal, and resourceful.²Many are embracing retailer loyalty cards, store brands, and coupons to save and are delaying purchases until items are marked down. These frugal behaviors are likely to endure in the coming year, as 94 percent of consumers plan to keep their spending on food, beverage, and household goods at its current level even if the economy improves. Nearly 80 percent of consumers still believe the U.S. economy is in a recession, and consumer cautiousness weighs on domestic consumer products sector growth.

Rising digital influence on consumer shopping: Growing numbers of consumers use websites, social media, and mobile apps to research products, compare prices, and make purchases. In a recent Deloitte survey, 92 percent of CPG executive respondents agreed that e-commerce is a strategic sales channel; however, only 43 percent believed their company had a clear, well-understood digital commerce strategy.³

Sluggish economic growth will likely continue, particularly in emerging markets. While emerging market economies are still growing faster than developed markets, the pace has reduced considerably. As a result, CPG companies are likely to experience weaker demand in some markets in the short-term than previously expected. Deloitte’s recent Global Economic Outlook notes that the global economy is growing at a modest pace as Europe remains in recession, the U.S. is on a path of moderate growth, and key emerging markets face slower growth.6

Other potentially disruptive trends include:

An uptick in merger and acquisition (M&A) activity: The consumer products industry is likely to witness more M&A activity as large CPG companies and private equity firms take advantage of sizable cash reserves, low interest rates, and easy access to credit to increase exposure to faster-growing markets, consumer segments, or product categories. On the flipside of acquisitions, CPG companies are likely to continue to divest non-core or underperforming businesses to fund acquisitions or improve growth prospects.

Arise in digital marketing effectiveness: As consumers increasingly embrace shopping technologies, the effectiveness of digital marketing continues to improve. Consumers are more interested in using smartphones to pull up mobile coupons, identify sales, and compare prices—even for food, beverage, and household goods. CPG companies are beginning to use social media to better connect with consumers, and many are now able to measure ROI in digital media marketing.

Increased regulatory focus on consumer health: Regulators across the world are monitoring the impact of products on consumers’ health and well-being. Many regulators are trying to levy higher taxes on products that are considered unhealthy, introducing measures to improve product safety, scrutinizing product claims and labels, and discouraging marketing to children.

Rethink brand and product portfolios: In the 2013 American Pantry Study, 76 percent of U.S. consumers surveyed believed that, “going through these economic times has caused me to realize which brands I really care about and which ones are less important to me.”8 Those brands with the highest loyalty outperform other brands on perceived product performance, experience, and trust. As consumers are re-evaluating their brand relationships, CPG companies will likely need to rethink their product portfolio in light of the widening gap between the affluent and lower-income households. They might also develop distinct strategies (e.g., brands, product offering, pricing) to target affluent and lower-income consumers.

Align go-to-market strategies with emerging retail channels: Many CPG companies are still organized to sell primarily through traditional retailers (e.g., grocery and mass merchandisers). Companies that adapt their structures to tap into emerging channels (e.g., e-commerce, dollar, and club) may be able to respond faster to the shifts in the consumer and retail environment. Succeeding in these channels may require pricing and trade promotion strategy that acknowledges potential channel conflict by providing unique product-price value propositions.

2014 Consumer Products Industry Outlook

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